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Article 13(5) of India-Netherlands Double Taxation Avoidance Agreement (DTAA); Section 112 of the Act – Buy-back of shares under a scheme of arrangement was not “reorganisation” as contemplated in Article 13(5) of India-Netherlands DTAA, transfer did not qualify for participation exemption; however, the transfer qualified for concessional rate u/s. 112 of the Act
Facts
The taxpayer was a resident of Netherlands. It held 38.24% of shares of an Indian company (“IndCo”) whose shares were listed on Indian stock exchanges. During the relevant year, IndCo proposed a scheme of arrangement for buy-back of its shares. The said scheme was approved by the jurisdictional High Court. The taxpayer tendered all the shares held by it and received consideration resulting in capital gains. The taxpayer contended that in terms of Article 13(5)3 of India-Netherlands DTAA , the capital gains were not chargeable to tax in India.
According to the Tax Authority, since the taxpayer sold its shares to IndCo, which was an Indian resident, capital gain did not qualify for participation exemption under Article 13(5) of India-Netherlands DTAA . Further, according to him the concessional rate of 10% provided in the second proviso to section 112 of the Act was not applicable in case of the taxpayer and hence levied tax on capital gain @20%.
The moot point before the Tribunal was whether the shares tendered in the scheme by the taxpayer constituted “reorganisation” in terms of Article 13(5) of India-Netherlands DTAA .
Held
As regards whether buy-back is “reorganisation”
Since the scheme was approved by High Court, there was no colourable device.
Reorganisation should involve major change in financial structure of a corporation, resulting in alteration in rights and interests of security holders. In the present case, upon implementation of the scheme there was no change in the rights and interests of the shareholders. Only change was that pursuant to reduction of share capital the percentage of shareholding of the promoter group had gone up. That cannot be considered as change in the rights and interests of shareholders.
The reorganisation contemplated in section 390 of the Companies Act 1956 consists of either consolidation of shares of different classes, or division of shares into different classes, or both.
Transfer of shares pursuant to a buy-back scheme could not fall under the ambit of the term “reorganisation” since the objective of the scheme was not financial restructuring, but providing exit to non-resident shareholders.
As regards rate of tax
Having regard to the decisions in Cairn U.K. Holdings Ltd. (2013)(359 ITR 268)(Del) and ADIT vs. Abbott Capital India Ltd. (65 SOT 121)(Mum Trib), the taxpayer is entitled to the concessional rate of 10% under section 112 of the Act.
